The Global Manufacturer: Is Technology the Answer to Our Economic Doldrums?

Plant your flag in either the glass half full or half empty camp. The stock market has made a nice recovery, real estate has come out of its coma and consumer confidence is strong. Things are looking up. Anywhere from 12 to 20 million (depending on how you look at the statistics) Americans are out of the labor force, economic growth rates are low and when the Federal Reserve mentions a pullback on bond purchases, the markets faint. We still have a long way to go.

But whichever camp you occupy, you're still left with the conclusion that this recovery has been weak and disappointing. It feels as if something is fundamentally wrong with the U.S. economy. And that's why an economic paper from the National Institute of Standards and Technology (NIST) should receive more attention for the path to prosperity it proposes.

Gregory Tassey, an economist at NIST, says too much attention during the economic recovery has been focused on monetary and fiscal policy. He argues the traditional Keynesian approach to a recession -- deficit spending to bolster employment and consumer spending -- is having less impact than in the past, largely because much of the money is spent on imports. And, he warns, money that could go to fiscal stimulus is instead allocated to pay the interest on the burgeoning federal debt (in fiscal 2012, that was $360 billion).

There's plenty of research, Tassey maintains, that technology plays a central role in long-term productivity and output growth. As our productivity grows, he notes, we become more competitive globally and our national income rises. But technology's role in economic growth has been ignored by many economists because it is considered a private good and thus not an area that requires government support.

"Not surprisingly, therefore, the U.S. federal R&D funding relative to GDP has dropped over the past 50 years by 167% -- a counter trend to the rest of the global economy," Tassey writes.

But today's technology advances don't come out of private labs as they did in the storied days of Bell Labs and Xerox's PARC. The reality, Tassey maintains, is that technology development is a complex public-private activity. Early research efforts require public support because it may take years for a technology to reach commercialization. Even the "largest R&D-intensive companies no longer have the total complement of internal research and production assets nor the market scope to capture the full benefits of investment in new technology platforms," he explains.

Traditionally, federal support for technology has focused on specific objectives such as national defense or clean energy, Tassey says. "While the R&D budgets of the agencies that focus on these areas may be optimized for their specific missions, they are not optimized for economic growth," he argues.

Nor are those R&D policies connected to the eventual commercialization of the technologies as they move into the global market and create jobs and corporate profits, Tassey says.

What the U.S. should be investing in, Tassey advocates, is an "emerging innovation ecosystem" that is a "far more complex and integrated set of industries, universities and government institutions than what characterizes the Industrial Revolution." This ecosystem requires investment in "human capital, better channels for technical and business knowledge diffusion to firms of all sizes, capital formation, intellectual property protection, and modern industry structure (i.e., co-located and functionally integrated supply chains)."

Regional technology clusters embody this approach to economic growth. It is also the concept behind President Obama's proposed $1 billion network of 15 manufacturing innovation institutes. But we need a broader and more coordinated effort to compete with rising economic powers.

Smart companies are already voting with their feet on this model. A recent report from Jones Lang LaSalle notes that highly educated workers are so important to increasingly technical manufacturing firms that their presence is becoming a determining factor for the location of companies.

"Having access to this talent is one of the reasons that manufacturing facilities for technology firms are often located in tier one locations where labor and real estate are generally more expensive," says Greg Matter, a vice president at Jones Lang LaSalle.